13 May 2016

Understanding Apple's $1 Billion Investment in Didi

Today, Apple announced a $1 billion investment into China's leading ridesharing service, Didi Chuxing. While this makes Apple a minority investor in Didi (with an ownership stake well below 5%), this investment is notable for a few reasons. For one, it is Apple's largest strategic investment since their $3 billion acquisition of Beats two years ago. It also comes at a time when VC money has been moving away from companies with high burn rates and excessively reliance on subsidies (a fairly accurate description of Didi's business). However, understanding Apple's rationale for this deal is tricky.

Tim Cook claimed that Apple made the investment "for a number of strategic reasons, including a chance to
learn more about certain segments of the China market" -- basically a non-answer. Left to our own devices and looking at Apple's business today, there are a few possibilities:

Play for Apple's Rumored (Semi)Autonomous Car

This is the first thought that popped into my head. Apple has been rumored to be developing a (possibly autonomous) car for a while now. The most obvious application of a fully autonomous car is in a ridesharing service, so this seems like a natural fit. Could Apple be interested in Didi as a means to get their car project to the market?

It seems logical, but there are a few problems with this theory. Apple's primary business model is hardware sales (similar to Tesla) as opposed to services (like an Uber or Google). This means that they are more likely to invest in semi-autonomous tech and improve the automobile user experience to appeal to high-end car buyers (e.g. those buying Teslas today). An autonomous car sharing service is directly opposed to the concept of car ownership and is, therefore, antithetical to Apple's business model. In simpler terms, an autonomous car sharing service is likely to reduce car ownership, which in turn could affect consumer sales for Apple's rumored car. However, this isn't the biggest problem with the theory.

If Apple was truly interested in pursuing the ridesharing model for their car project, why would they choose to invest in a service that is popular only in China (excluding "roaming agreements" with ridesharing companies in a few other countries)? Wouldn't it make more sense for Apple to invest in or acquire Uber? They certainly have the cash for it. Uber holds a strong market position in ridesharing globally (including China) as opposed to Didi's regional focus. And while Uber's financial position isn't ideal, it appears to be in far better shape than Didi is.

Strengthening Apple's Services Revenue

The next possibility relates to Apple's recent attempts to shift Wall Street's focus from declining iPhone sales to their small but growing stream of services revenue. I have long been a critic of the combined "devices & services strategy" for reasons I have delved into in previous posts. But assuming this is Apple's end goal, is it possible that their investment in Didi was to increase Apple Pay adoption and, hence, revenue from payments?

I find this unlikely for the same reason as above. If this was Apple's goal, it would have made much more sense to target a global player like Uber (who's market share rivals Didi's in China). By making Apple Pay the default payment option for Uber on iPhones, adoption would have skyrocketed globally (including China) bringing in more revenue (whether that revenue would be consequential for Apple is an entirely different argument). Instead, Apple chose to invest in a homegrown Chinese company locked in a subsidy war for regional dominance. Subsidized prices -> lower payment fees.

Gain Regulatory Favor in China

The third possibility is that an investment into a homegrown Chinese "unicorn" was aimed at gaining favor from China's regulatory agencies. For many years, Apple was largely insulated from government oversight (unlike Facebook and Google). But this changed last month when a few of Apple's services, namely iBooks and iTunes Movies, were banned in China. Was this investment a way to defend other Apple services against government oversight? There may be some truth to this.

According to Fortune, "Didi’s president Jean Liu said the Apple deal happened
quickly, following a meeting in Apple’s Cupertino headquarters with CEO Tim
Cook on April 20th". That's quite quick for an investment of this scale. What's even more interesting is that news of China banning iBooks and iTunes Movies hit the press the very next day, on April 21st. Of course, Didi is likely to adopt Apple Pay (at least on iPhones). But that appears to be an added benefit rather than the primary motivation.